When interest rates rise, cap rates tend to rise too, because buyers who earn more on bonds or pay more for debt want a higher yield from property; on the same income, a higher cap rate means a lower value. The link is loose, not one for one: rent growth and risk matter too.
Updated 19 October 2026. Published by Titleman, which makes one of the tools compared.
The mechanism
A cap rate is a property's net operating income divided by its price. Value is the same relationship turned around: value = NOI ÷ cap rate. Three things connect it to interest rates.
- The alternative. Property competes with other places to put money. When a safe bond pays more, a buyer wants more from a building, and the extra yield has to come from a lower price.
- The cost of debt. Most buyers borrow. A higher loan rate leaves less cash after interest at the same price, so buyers bid less until the yield works again.
- The discount applied to future income. A building's value is the income it will earn, discounted. A higher discount rate lowers the value of income that arrives later, which matters most when rents are expected to grow.
Why it is not one for one
Interest rates are one input to a cap rate. The others are the expected growth of rent, the risk of the income, the property type and the supply of buyers. A building where rents are expected to rise quickly can hold a lower cap rate through a rate increase than a building with flat income. Cap rates are also set by closed sales, and sales are few when buyers and sellers disagree on price. Sellers who do not have to sell may wait, which is one reason published cap rates can lag the move in interest rates. We have not measured the size of that lag or the typical response to a one-point move in rates for this page, so it states no rule of thumb. If you need one, take it from recent sales of similar property in the same market.
A worked example
This one is illustrative. A building earns 1,000,000 of NOI.
| Cap rate | Indicated value (NOI ÷ cap rate) | Change from 6.0% |
|---|---|---|
| 6.0% | 16,666,667 | none |
| 6.5% | 15,384,615 | -7.7% |
| 7.0% | 14,285,714 | -14.3% |
A one-point increase takes about 14% off the value, and the effect is larger at lower cap rates, because the same change is a bigger share of the rate. That is why an appraiser or analyst shows value at a range of cap rates instead of at one, and why the cap rate behind a valuation should always come with the sales it was taken from.
Negative leverage
Compare the cap rate with the cost of the loan. Suppose the building above is bought at a 6.0% cap rate for 16,666,667, with 70% borrowed on an interest-only loan at an assumed 7.0%.
- Loan: 11,666,667. Equity: 5,000,000.
- Interest: 11,666,667 × 7.0% = 816,667.
- Cash left after interest: 1,000,000 − 816,667 = 183,333.
- Cash yield on equity: 183,333 ÷ 5,000,000 = 3.7%.
The unlevered yield is 6.0% and the levered yield is 3.7%. Borrowing at a rate above the cap rate reduces the yield, which is negative leverage. A buyer can still accept it if rents are expected to rise fast enough to close the gap, but that is a bet on growth, not on today's income. This is how a rise in interest rates feeds into prices: when debt costs more than the property yields, a buyer needs a lower price, a lower loan or faster growth to make the deal work.
What to check before using a cap rate
- Which NOI. In-place, trailing and pro forma NOI give different cap rates on the same price. See pro forma versus in-place NOI.
- Which sales. Same property type, same market, same quarter, with the NOI behind each stated.
- Which direction rates have moved since. A sale closed before a rate move may not reflect today's price.
Tools for the job
| Option | Best for | What it does | Where it stops | Pricing model |
|---|---|---|---|---|
| Spreadsheet | One asset, a few rate cases | NOI ÷ cap rate at rates you type in | Sales and rates entered by hand | Staff time |
| Appraiser | A value of record | Licensed opinion with sales and income approaches | Ordered per assignment | Fee per assignment |
| ChatGPT-style general assistant | Explaining the concept | Text and formulas | No sourced sales behind a rate | Per-seat subscription |
| Titleman | A value opinion with the cap rate shown | Value opinion: approaches to value and comps. Underwriting: cap rate by NOI sensitivity grids | Not a licensed appraisal; a workbook comes back on about half of runs | Credits per run; ask on a demo |
Where Titleman fits
Send an address and the T-12 or rent roll, and a Titleman value opinion returns a report with the approaches to value, comparable sales and the income approach. A workbook comes with it on about half of runs: 62 of 113 finished in the 30 days to 12 October 2026. Every input shows its source and date; anything the sources do not provide is listed as a gap instead of filled. To see the effect of a rate move as a table, use Underwriting, which carries cap rate by NOI sensitivity grids; its workbook also comes back on about half of runs (31 of 62 in the same window), so state in the brief that you need one and check what returned. In the 43 finished value opinion runs of the 30 days to 11 October 2026, the median run took about 41 minutes and one in ten took about 73 minutes or more. A repeat run can differ, so a professional reviews the draft.
What this does not replace
A cap-rate range is not a forecast of what interest rates will do. A value opinion from Titleman is not a licensed appraisal, a final price, or a buy or sell verdict, and a lender that needs to rely on a value should still order an appraisal. It does not replace judgment about the market or the tenants, and an inspection of the building is a separate job.
FAQ
How do interest rates affect cap rates?
When borrowing costs and bond yields rise, buyers usually want a higher yield from property, which pushes cap rates up and prices down. The link is loose: cap rates also reflect income growth and risk, and they often move later and by less than interest rates do.
Do cap rates rise one for one with interest rates?
No. Cap rates are set by what buyers pay in actual sales, which depend on expected rent growth, risk and the supply of buyers as well as the cost of debt. There is no fixed multiple, and any rule of thumb should be checked against recent sales of similar property.
What happens to property values when cap rates rise?
Value falls if income stays the same, because value is net operating income divided by the cap rate. On 1,000,000 of NOI, moving from a 6.0% to a 7.0% cap rate takes the indicated value from about 16.7 million to about 14.3 million.
What is negative leverage?
Negative leverage is when the cost of the loan is higher than the property's cap rate, so borrowing lowers the buyer's cash yield instead of raising it. It tends to appear when interest rates rise faster than cap rates.
Can AI show how value changes with the cap rate?
In part. A Titleman value opinion returns a report with the approaches to value and the comparable sales behind them, and a workbook on about half of runs (62 of 113 finished in the 30 days to 12 October 2026). Value at a range of cap rates on an NOI you state is a cap rate by NOI sensitivity grid in Underwriting, whose workbook also comes back on about half of runs (31 of 62 in the same window). Neither gives a final price or replaces a licensed appraisal.
Next: valuation software versus appraisal software, what a cap rate is and how to value an industrial property. To see the cap rate and the sales behind a value on a property you own or cover, request a demo.